Eurozone Economy Expands at Fastest Rate in a Decade: How to Gain Investment Exposure

A flash estimate provided today by statistics company Eurostat indicates the economic growth in the Eurozone, comprised of the 19 countries that have the euro as their national currency, is at its highest rate in 10 years.

Over Q3 of last year, combined Eurozone GDP grew by 0.6%, with annual growth of 2.5%. That is significantly better than the UK’s 1.8% annual GDP growth for 2017, despite the final figure being a significant improvement on earlier forecasts for only 1.5% growth. Forecasts for the UK’s 2018 GDP growth range between a gloomy 1.4% the Chancellor Phillip Hammond attached to his Autumn budget and an optimistic 2.2% forecast by consultancy Capital Economics. The medium forecast for the Eurozone’s 2018 GDP growth is 2.3%. The Eurozone is also currently outpacing the USA, which saw 2.3% GDP growth in 2017.

The strong economic data that has been pouring out of the Eurozone has also seen the euro strengthen significantly against both pound sterling and the US dollar. That’s a trend currently expected to continue and means euro-denominated investments could also benefit from currency headwinds when converted back in sterling. Eurozone-focused funds are currently the geographical focus seeing the highest inflows of international investment capital.

That means Europe is not currently ‘contrarian’ but doesn’t mean it’s not still a good opportunity for this year.

Eurozone equity valuations are still below the global average. So how can those investing online add some Eurozone exposure to their ISA or SIPP portfolios?

In a piece for Investment Week, Ben Gutteridge, head of fund research at wealth managers Brewin Dolphin, included The JOHCM Continental European fund, managed by Paul Wild, in his top picks for 2018.

Over the past 3 years the fund has returned 50.3% and has a value bias with heavy weightings in energy, financials and basic materials. Wild’s strategy is to combine ‘gentle outperformance’ of the benchmark with low volatility.

With 2018 expected to see increased volatility on last year, that approach could be a better bet than European funds with a more aggressive approach but bigger potential downside if markets do, as many are predicting, go through a short-term correction in the first half of this year.

The Money Observer also tips the JOHCM Continental Europe fund for a Eurozone play. Alternatives suggested include the Investco European Equity Income Fund and JPM European Small Cos (JESC) for more adventurous online investors.

The former also focuses on value and has returned 42.3% over 3 years with an average yield of 2.9%. Over the past year the Investco EEI has returned 24%, roughly in line with other European funds. However, most of the sector is focused on growth companies rather than income and in that context Investco has significantly outperformed in a recent environment perfect for growth funds.

The JESC fund has returned 117.1% over three years and 51.8% last year with a yield of 1.1%. Despite performing strongly, the discount available on this fund has remained wider than those of its main rivals. It invests in undervalued and growth companies and consumer discretionary, technology and industrials are the sectors with the greatest weighting in the fund. The ratings of the companies held by the fund are considered by many analysts to still not be expensive and leaving room for further strong earnings growth and many of the stocks are tipped to be assigned higher ratings in coming months.

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